Strong Performance From Investment Sales in Commercial Property

Many of our clients have been asking us in recent months how the commercial investment market is performing after all the interest rate hikes we’ve experienced in the past 12+ months. The expectation, not irrationally, is that the values have been heavily impacted off the back of the cumulative interest rate rises. The reality has proven to be a different and more positive story, which is what we’ll explore in this blog.

Impact of Interest Rates

In recent times, the Reserve Bank of Australia (RBA) has orchestrated a series of twelve interest rate increases since May 2022. This monetary policy shift has left an indelible mark on various sectors of the economy. The prevailing notion, rooted in historical trends, was that these interest rate hikes would trigger a corresponding shift in the yields and values of commercial investment properties. However, the reality that has unfolded defies these expectations.

Prior to this sequence of rate hikes, the landscape of commercial investment properties in the Central Coast region was marked by yields typically ranging from 5% to 5.5%, occasionally dipping to 4% or soaring to 6%. The surge in official interest rates, spanning from a mere 0.10% to 4.10% between May 2022 and June 2023, had pundits bracing for an upheaval. Traditionally, notable changes in interest rates had been followed by analogous fluctuations in commercial property yields, which in turn influenced property valuations.

The core expectation was that the remarkable escalation in interest rates would inevitably lead to a reduction in commercial property values, with the rental income acting as the fulcrum.

“Contrary to projections, the commercial property investment market has displayed an unexpected degree of resilience in the face of the substantial interest rate hikes.”

While historical trends painted a picture of values hinging on yield adjustments, the market has demonstrated an ability to absorb and adapt to the changing landscape. Commercial properties have managed to maintain their appeal to investors, even as the cost of borrowing and financing has become more substantial.

Several factors have likely contributed to this unexpected outcome. Investors have likely taken into account broader economic indicators in their decision-making, the long-term stability offered by the property market, and the unstable performance of other asset classes. In fact, the shifts in demand dynamics resulting from the attractiveness of commercial real estate as an asset class has been a very strong driver, as it has kept competition strong amongst buyers.

Outlook for Interest Rates

As the economic landscape continues to evolve, so does the outlook for interest rates in Australia. Following the abovementioned sequence of interest rate increases, many experts are now indicating a shift in the trajectory, suggesting that the era of significant hikes may be drawing to a close, albeit slightly extended due to persistent high inflation rates.

In conversations with professionals across the finance sector, including financial planners, mortgage brokers, accounting firms, and banking insiders, a prevailing sentiment emerges: the short-term future of interest rates appears to be one of stability. While the possibility of a small rate increase remains on the table, the overarching consensus points towards a period of respite.

The Reserve Bank of Australia (RBA) seems poised to establish an environment of consistency, with indications that official interest rates will remain unchanged for the remainder of the current financial year. This projected stasis is rooted in the RBA’s pragmatic response to economic conditions and its aim to strike a balance between curbing inflation and supporting economic growth.

Looking further ahead, the forecast envisions a potential paradigm shift. It’s anticipated that the tail end of the 2024 calendar year might usher in a reduction in official interest rates. Of course, this projection comes with the caveat that a multitude of factors, both domestic and international, could intercede and alter this predicted course. Nonetheless, with present assumptions held steady, a more stable operational environment seems likely to take shape.

As always, economic forecasting is a complex endeavor, subject to the ebb and flow of local as well as global dynamics. The current consensus underscores the importance of monitoring key indicators, including inflation rates, unemployment figures, international dynamics, as well as local trends (simple and complex at the same time). By doing so, businesses and investors can better position themselves to adapt to evolving interest rate landscapes and navigate the ever-shifting terrain of the financial world.

Buyer Demand is Strong

In the midst of these evolving economic conditions and fluctuating interest rates, the commercial property market on the Central Coast has continued to shine with a noteworthy display of resilience. Investor interest, which remained steady throughout the sequence of interest rate hikes, has recently experienced an encouraging upswing. This surge in demand, coupled with cautious yet confident buyer behavior, underscores the market’s buoyancy as the economy seeks stabilisation.

“The demand from investors for commercial properties has showcased remarkable consistency, defying initial expectations of a potential downturn.”

Throughout the period of interest rate hikes, interest from buyers held fairly strong, and the recent uptick suggests a burgeoning trend. This resurgence in demand indicates a heightened confidence in the economic trajectory, prompting more investors to explore opportunities within the commercial property sector.

What’s particularly notable is the prudent approach that buyers are adopting. Rather than rushing into hasty decisions, investors are exercising due diligence and careful consideration. This measured approach reflects a blend of optimism and caution, indicating that while the market is attractive, investors are discerning in their selection of assets.

Historical patterns hold true in terms of demand variation across different classes of assets. Multi-tenanted properties continue to enjoy widespread popularity, underpinned by their proven track record of stability. Nevertheless, buyer interest spans a broad spectrum, encompassing office spaces, retail properties, and industrial sites. This diversity in demand speaks to the commercial property market’s adaptability and resilience, as it navigates through shifting economic landscapes.

The robustness of investor demand has played a pivotal role in preventing the anticipated softening of yields. The consistent influx of buyers seeking commercial properties has contributed to maintaining a stable pricing environment, even amidst the changing tide of interest rates.

The sustained and improved investor interest in the Central Coast commercial property market stands as a testament to its enduring appeal. The convergence of cautious yet confident buying behavior, combined with varying demand across asset classes, has propelled the market forward, defying potential expectations of decline. As the market continues to navigate evolving economic dynamics, the depth of investor demand remains a cornerstone of its stability.

Latest Yields Achieved

As the above review states, we have not seen the expected impact on commercial property values that was expected to result from the substantial increase to interest rates. The most recent sales in the Central Coast commercial property market demonstrate this ably. Following is a quick summary of the yields that have been achieved in different sectors and values recently.

Property SectorValue RangeYields (net) Achieved
Retail (single tenant)$0-$1m5.2%-5.5%
Retail (multi-tenant)$1m-$2m5.4%
Office (single tenant)$0-$1m6%-7%
Retail/Office (multi-tenant)$1m-$2m5.4%
Industrial (single tenant)$0-$1m5.2%-6.5%
Industrial (single & multi-tenant)$1m-$3m4.8%-6%
Industrial (single & multi-tenant)$3m+6%-6.7%

The above table demonstrates the continued strength of the investment market and appetite from buyers for commercial property. As we’ve already noted, multi-tenanted commercial assets remain the best performers, though we can see that they are not the only segment of the market that is achieving great results.

As always, we can draw an overall picture from this data, and that’s a very encouraging picture for the commercial property market, but it doesn’t tell everything. For example, the asset that achieved a yield of 4.8% was under-rented, so the purchasers can buy the property knowing that they will be able to promptly improve their return, enabling them to purchase the property on a lower initial yield. Even taking some of those outliers out of the equation, we can still see really strong demand and performance across the commercial property investment sector.

Conclusion

We have to face facts and acknowledge that we’ve just been through an extended period of incredibly low interest rates and access to some very cheap money, which is virtually unprecedented. We all knew it couldn’t last.  The great news is that we’ve come back to a more ‘normal’ type of interest rate environment, historically speaking, and we’re still seeing excellent demand for commercial property, and excellent results.

“If you’ve been considering selling your property but assumed that now is not a good time due to the current interest rate environment, then you should think again.”

With stability returning to the interest rate market, continued strong demand (even increasing demand) from buyers and a competitive landscape offering only a small number of opportunities, now really is a great time to capitalise on a strong market and achieve a great price.

If you have been or are considering selling, we can help you with a review of your property and its current market values, so please get in touch with us. We’d love to help!